What happens when an auctioned property gets a higher value after the bidding is closed? Can a liquidator overlook the higher bid and settle for procedures than interest of the company whose property is auctioned?

In the case involving FCS software solutions Ltd and LaMedical Devices Ltd and others ((2008) 10 Supreme Court Cases 440), the court observed, in the event if the property had not been handed over and the transaction not closed, the liquidator could consider the higher bid in the interest of the company under liquidation and its creditors.

It was made clear that property under liquidation Appellant appears to be the first bidder (1.47 crores) and the defendant appears to be the highest bidder (3.5 crore). In the above case, property of a company situated in U.P was auctioned by the official Liquidator (OL).

The appellant was the highest bidder and finalized it for Rs. 1.47 crore. The appellant wrote a letter in 2004 followed by a reminder in 2005 requesting the Official Liquidator to expedite the process and issue a letter of acceptance. As there was no response, he made a complaint to the company judge in 2005.

Possession not given

Subsequently on payment of the amount the liquidator informed the appellant that the property would be handed over. However, possession was not given and the appellant was intimated that a higher bid at Rs. 1.55 crores had been received. The appellant filed an objection with the company judge stating that the sale was already confirmed and the full amount was paid.

Hence, the liquidator had to hand over possession of the property. In the mean time more offers were received for the same property and the highest among them was Rs. 2.10 crores. The company judge directed resale of the property by inviting tenders in 2006. The reserve price was fixed at Rs. 2.10 crores.

The appellant (FCS software solutions Ltd) challenged this order, which was dismissed by the Division Bench since the highest offer at the time was for Rs. 3.5 crores. The appellant then approached the Supreme Court. A counter affidavit was filed by the bidder who offered Rs.3.5 crores stating that the notice issued earlier was incomplete and invalid, as it did not state the fair value of the properties. In addition it was mentioned that the reserve price was not fixed. It was contended that in view of such irregularities the property could not fetch fair market price.

Auction sale

The Supreme Court while issuing orders in this case referred to an earlier judgment - MUs Union Bank of India vs. official Liquidator ((1969) 3 SCC 537) “In the auction sale of the property of the company which is ordered to be would up, the company court acts as a custodian for the interest of the company and its creditors.

It is the duty of the company court to satisfy itself as to the reasonableness of price by disclosing valuation report to secured creditors of the company and other interested persons. It was further held that the court should exercise judicial discretion to ensure that the sale of the property should fetch adequate price. For deciding what would be the reasonable price valuation report of an expert is essential the company judge himself must apply his mind to the valuation report ….The Supreme Court further said the approach of the company judge should be to get highest price to satisfy the maximum claims against the company in liquidation and the procedure followed by him cannot be said to be illegal and dismissed the petition.

It is the duty of the company court to satisfy itself as to the reasonableness of price by disclosing valuation report to secured creditors of the company and other interested persons. However, as the appellant’s bid was accepted in 2004 and he had deposited the entire money, it would be appropriate that the respondent who bid for Rs. 3.5 crores pay an amount of Rs. 30 lakh to the appellant to serve the ends of justice, the Court ruled.